Important Terms in an Independent Contractor Agreement

A good contract should protect both of you

Hiring an independent contractor to work for you sounds like it should be easy. There's no complex paperwork the way there is with an employee—you just shake hands and get going, right?

Not quite. As with any other business relationship, it's important to establish the terms under which you'll work together to avoid conflict. Consider having him sign a simple agreement. The contractor will sometimes initiate this conversation.

What Is an Independent Contractor?

She must pay self-employment tax—Social Security and Medicare—as well as income taxes, but she must deal with this herself. You're not responsible for withholding anything from payments you make to her. She should send her own estimated tax payments to the Internal Revenue Service every few months.

Make sure the individual you're planning to do business with really is an independent contractor. This means she's free to determine how the work is to be performed when it's to be performed, and in some cases where it is to be performed. If you assign hours when she's to work and if you have final control of when and how she's paid with no input from her, she's more likely an employee.

Why Prepare an Independent Contractor Agreement?

The start of a work arrangement is the time to clarify an agreement and the best way to do that is to put everything in writing.

You'll be working on assumptions if you don't write everything down and these assumptions can cause problems and can result in costly and time-consuming litigation later.

An independent contractor agreement should include several important sections.

General Agreement and the Nature of the Work

The first part of the agreement is typically a statement by both parties detailing what each will do.

For example, the company might agree to pay the contractor for such-and-such work and the contractor agrees to provide the work by a certain date and under certain conditions.

The nature of the work should also be described in detail. Exactly what is it that the contractor is going to do for you? If he's providing a product, when will he deliver it and how?

Independent Contractor Status

This very important part of the agreement clearly defines the worker as an independent contractor, not an employee. It lists the rights of the contractor to perform services for others unless they directly conflict with or compete with the work for this company. It should state whether you'll provide assistants or if the contractor will use his own employees to help perform the work.

This section also states the specifics of any training to be received by the contractor. An independent contractor is usually a professional, however, so training is typically minimal and limited to describing the specifics of the work to be done for this particular company.

Who Pays Taxes?

This section typically clarifies that the payments made to the independent contractor do not include withholding for income tax or payroll taxes.

No federal or state income tax is withheld from payments to the contractor unless it's required by backup withholding requirements. No FICA taxes are withheld from the contractor's compensation and they're not set aside by company on behalf of the contractor.

No state or federal unemployment compensation contributions or workers compensation fund payments are paid by the company on behalf of a contractor. The contractor pays income taxes, sales taxes, Social Security, and Medicare taxes as a self-employed individual. Some contracts require that the independent contractor provide proof of these payments.

Eligibility for Benefits

The contract should include a statement clarifying that the contractor understands that he or she is not eligible for or entitled to pension or retirement benefits, health insurance, vacation pay, sick pay, holiday pay, or other fringe benefits typically provided by an employer.

Insurance

The contract language should clarify that the company will not provide liability insurance for the contractor and that the contractor will not be covered by the company's liability insurance policy. This clause provides protection for you if some injury or loss is caused by the contractor.

Depending on the type of services provided by the contractor, this section should clearly state that he might be required to provide proof of the existence of general business liability insurance coverage. Some companies go even further and request a statement by the independent contractor that the company will be indemnified or held harmless in the event of injury or loss.

Termination of the Contract

Because this is a contract with an independent contractor, not an employee, the contract should state that either party can terminate the agreement with or without notice, depending on the circumstances. Provide a framework of those circumstances.

Restrictive Covenants

Depending on the nature of the work, you might want to impose restrictive covenants on the independent contractor, such as a non-compete clause that restricts her from setting up a competing business within a certain time and in a certain area.

A non-solicitation clause restricting the independent contractor from soliciting customers or employees of the hiring company can also be helpful. You could also include a non-disclosure clause/confidentiality agreement that restricts the contractor from disclosing company secrets or using secrets for her own gain.

Litigation or Arbitration

What happens if it all goes south despite all the care you've taken to ensure that you understand each other? Many business contracts include a mandatory arbitration clause these days requiring that contract disputes be settled by arbitration rather than litigation.

Can You Prepare Your Own Independent Contractor Contract?

You can find templates for these contracts on the Internet, and you might be tempted to prepare your own, but every business situation is different. A basic template might not include all the sections that your specific business requires. Consider having an attorney draw one up. You can always use that format to write contracts with other independent contractors going forward.